The Economic Effects of Taxes and Regulations, in Pictures

Specialization by economic units and trade between them enables all of them to enjoy more material things than they would if each of the units stood alone. This is “before,” where relatively inefficient economic units stand alone (indicated by the interstices):

With specialization and trade, there can be more economic units, and each of them can make a greater contribution to the output of others:

Taxes shrink the output of economic units by reducing incentives to produce, and by diverting resources to nonproductive, and counterproductive governmental uses. Regulations effectively eliminate many of the units that would otherwise exist and whose products would enable the expansion of all units:

And so, with regulations and taxes as they are today, the economy realizes a fraction of its potential output.

Related posts:
The Price of Government
The Fed and Business Cycles
The Commandeered Economy
The Price of Government Redux
The Mega-Depression
Ricardian Equivalence Reconsidered
The Real Burden of Government
Toward a Risk-Free Economy
The Rahn Curve at Work
The Illusion of Prosperity and Stability
Estimating the Rahn Curve: Or, How Government Inhibits Economic Growth
The Stagnation Thesis
America’s Financial Crisis Is Now
A Keynesian Fantasy Land
The Keynesian Fallacy and Regime Uncertainty